The Impact of Gold Imports on Growth - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 23 June 2012
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- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
In the last few months, there has been little good news regarding the Indian economy. At every instance we are witnessing a decline in the health of the economy. GDP growth has been falling, the rupee has been falling, inflation is not falling, and pessimism is growing. The global crisis is also having a negative impact on the economy.

Is there any good news out there? For all the worry we have over the declining rupee, we are finally starting to see some of the benefits of a weak currency. In general, having a weaker currency makes imports more expensive and exports cheaper. Thus, imports should fall and exports should rise. Over time, this will be positive for growth because exports add to growth and imports subtract from growth.

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There is not much good news on the export front, due largely to the global debt crisis. But things have improved on the import front. We are importing less, because imports are getting more expensive. In particular, our gold imports have dramatically declined. In part, this is due to increased taxes on gold imports, and in part it is due to higher gold prices. According to the latest reports, gold imports have fallen around 50% from a year ago. This means we are importing half as much gold as before.

How will this help growth? Consider the following: Last year, our gold imports represented approximately 3.5% of total GDP. As imports are a drag on growth, this effectively means that gold imports result in a 3.5% subtraction in GDP. Thus, if gold imports fell to 2.5% of GDP, then we'd see an increase in growth of 1% as a result.

Now it makes sense why having lower gold imports is good for GDP growth. If as projected our gold consumption declines by half, this could add between 1% and 2% to our GDP growth rate, as compared with the previous year. This is a very large number, considering that it is a single commodity.

When GDP growth comes out for April-June, we should see the positive impact of lower gold imports. Of course, this does not mean that growth will necessarily go up, simply because other factors also affect growth and they could be stronger than the impact of the reduction in gold imports.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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3 Responses to "The Impact of Gold Imports on Growth"

Raj Nigam

Mar 19, 2013

Thank you this was very helpfull.

Like 

Prasad

Jun 26, 2012

There is no direct relationship between falling gold imports and increase in GDP rate. The entire fall in gold import doesn't necessarily go into productive assets. By the same logic, Mr Dossani should throw a light on how falling real estate prices would improve the GDP rate.
Rather than worrying about high gold imports, govt needs to address the issue that causes people to divert their savings into gold. RBI must float inflation protected bonds, govt should borrow less and promote exports and arrest falling Rupee.
Remember, if there is global currency crisis, Indian citizens' gold holding will keep the consumption going even in bad times.

Like (1)

C K VAIDYA

Jun 24, 2012

I don't understand the connection that seems implicit to you between gold (or any other) iport as a %age of GDP & the growth rate. If this connection is so direct, will we see another sizable increase in GDP since our imports of petroleum and other energy sources will cost us much less this year?
If our govt had banned gold imports, would we have seen 3.5% higher growth in GDP last year?
I will be greatful if you can suggest any reading material to enable me grasp this issue.

Like (1)
  
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